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UK employers plan to use salary sacrifice to offset cost of auto-enrolment

The new UK automatic enrolment requirement, which will ultimately apply to all UK employers requiring them to enrol their “eligible workers” automatically into a pension scheme and pay a minimum level of contributions, comes into force from 1 October 2012. The DWP has estimated that this new legal requirement, which is being phased in and will initially only apply to larger employers, will cost UK businesses £2.8bn by 2050[1]. This cost will mainly result from increased take-up of employers pension schemes and increased administration and compliance costs.

To offset some of the additional costs associated with automatic enrolment, the experience of international law firm Eversheds suggests that many employers are planning to introduce a salary sacrifice arrangement for the payment of workers’ pension contributions, as this can result in significant national insurance savings for an employer. Under a salary sacrifice arrangement, the worker agrees that he or she will give up – or “sacrifice” – a portion of salary, and have this paid directly by the employer into the pension plan. Because this element of remuneration never passes from employer to employee, both parties save the national insurance contributions that would otherwise have been levied. For an employer with 5000 workers on an average wage of £25,000, using salary sacrifice for auto enrolment could save the employer over £500,000 per year.

Commenting on the potential benefits of salary sacrifice for employers, Francois Barker, Pensions Partner at international law firm Eversheds LLP says,

“Many employers are planning to introduce or extend salary sacrifice arrangements to offset some of the additional costs arising from the new automatic enrolment requirements. In the current economic climate, the savings that can be achieved are simply too large for many employers to ignore. There had been some concern over whether salary sacrifice would work in the new auto-enrolment environment, but HMRC has recently confirmed that it does, which is welcome news for employers. However, care still needs to be taken over how and when any salary sacrifice arrangement is communicated and implemented to ensure that it is valid and that it is implemented in a way that is consistent with an employer’s automatic enrolment duties.”

Andrew Quayle, a Tax Partner at Eversheds who specialises in employee rewards, added:

“Even those employers who currently make use of a salary sacrifice arrangement for their pension scheme need to make sure that the arrangement will continue to operate effectively. Existing salary sacrifice documentation may not be suitable for employees who have joined a pension scheme by automatic enrolment.”

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